The Light at the End of the Tunnel
Published on - December 6th, 2006 (Modified on - May 24th, 2007) (by J.D. Roth) It’s an odd feeling to be accumulating money for the first time in my life.
When I was young, my family didn’t have much money. Any money I earned, I spent. This was a learned behavior. I was imitating my parents. After college, I allowed myself to be trapped in a life of credit hell. About five years ago I began to wean myself from credit. And in December 2004, I began the process of digging myself out of the hole.
I sat down one evening, made a list of all my debts, and stared at the numbers. They were intimidating. I had a car loan, a home equity loan (which I had used to consolidate my credit card debt), a computer loan, and two small personal loans. I had about $30,000 in debt. I knew that I ought to pay the home equity loan first because it had the highest interest rate, but I couldn’t bring myself to do it. It felt like I’d be paying on it for an eternity.
I had just received my Christmas bonus, and it was enough to pay off one of the personal loans and most of the computer loan. So, I wrote checks for these and mailed them. I felt guilty not having paid on my home equity loan. But when my bills arrived in early January, it was a relief to have one less debt, and to have the computer nearly paid off. “In fact,” I thought, “if I scrounge, I can actually pay off the computer loan now.” And so I did.
Within a few months, I had scraped together enough money to pay off everything but the home equity loan. It was amazing! I felt like a burden had been lifted. But I was still over $20,000 in debt, and the monthly interest was killing me.
For the past eighteen months, I’ve been plugging away at the home equity loan. I now owe $18,676.96. I’ve been gradually accelerating payments on it. With the end of the year approaching — and the all-important holiday bonus — I spent some time drawing up a repayment plan. My plan is aggressive, but not impossible. I want to be completely debt free — except for the mortgage — by the time I turn 39, at the end of March 2008.
It’s exciting to see this goal on paper, and to realize it’s within my grasp.
Meanwhile, I’ve begun to accumulate small pools of money here and there. I have a fine retirement plan through my day job, but I also started a personal Roth IRA through Sharebuilder last January. (I’m putting money into it when I can, but I won’t max it out until after I’ve repaid my home equity loan.) I have two savings accounts that are beginning to accumulate cash. These are the first savings accounts I’ve ever had. Ever. I also have an emergency fund with my wife. (We keep separate finances — that’s a subject for another entry.)
My checkbook is most impressive of all. I’m not running a zero balance. I’m not living paycheck-to-paycheck. I’m not toying with overdrafts every pay period. No — I’m carrying several hundred dollars in my checking account at all times.
But I still feel the urge to spend.
Though I’ve budgeted to use my Christmas bonus to pay down the home equity loan, I have visions of the shiny new toys this money cold buy: a new bicycle, more comic books, a fancy leather easy chair. In the past, I would have succumbed to these urges, prolonging my debt repayment. This year, I believe I have the fortitude to stick to my plan. If mid-January rolls and I’ve managed to use the money wisely, I’ll be very happy.
I’ll be happier still when I’m debt-free in March 2008.
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Congratulations on the progress you’ve made so far. Not only were you able to stop going in the wrong direction of increasing debt, but you’ve reversed the trend and you are chipping away at the debt. Keep up the good work.
In the past 4 years, my wife and I have been on a similar path. We managed to pay off our student loans, both of our cars, all credit card debt and the $41,000 line of credit we had on our house (the 15 part of an 80-15-5 loan). I also have the cash available to replace my 190,000 mile Corolla when that finally dies.
I’d be very interested in hearing why you and your wife keep your finances separate. I can’t think of any way that that strengthens a marriage, but I can think of a ton of ways it threatens one. It could also eventually completely derail years of hard work on your part.
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A wonderful article showing the progress of what I’d assume most of America is going through… and a clear path out. Your blog continues to inspire and teach. Thank you for that.
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Great work on paying down your debt. May I suggest that you consider making two smaller payments per month on your home equity loan instead of one larger one? This will result in you having to pay less interest.
Keep up the good work.
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Hey JD,
Ive been visiting your site since late September and I came across it via another linked site which I found when I typed “successful” into google (or something similar to that effect).
It is great to see you are doing so well, especially with the self-discipline you are practising.
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Can I ask why you are saving and putting money in a Roth when you owe on your home equity?
I’m all for saving, but you’re basically taking home equity money and investing it. Taking money at whatever your percentage rate is (say 7%) and investing it trying to get more, say 10%, only netting yourself 3%.
If I were in your shoes, I would hold off on investing while I had outstanding interest accruing accounts.
Tim
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Seven years ago I had over $20,000 in credit card debt, plus a car loan. But I worked my way out of it much as you’ve been doing and I’ve been 100% debt-free for the past four years. It’s a wonderful feelling. We’re planning to buy a house next year (for the first time in my life, at age 47), which will put me back in debt, but I’m planning to pay off the mortgage in 10 years or so (we’ll use ING Direct for the mortage, because they don’t penalize you for paying it off quickly).
It’s funny, when I was in debt I still had the urge to spend, but now that I’m debt-free I feel like I have everything I need.
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Tim wrote:
Can I ask why you are saving and putting money in a Roth when you owe on your home equity?
This is a good question. The answer is essentially the same as why I advocate a debt snowball for some people (including myself) as opposed to the more financially prudent “pay the highest interest debt first” approach. It all boils down to psychology. By allowing myself to have a little “play money” with which to invest, I’m getting a feel for how the stock market (and Sharebuilder) works.
The amounts I’m dealing with are relatively small. To date, I’ve invested $838. But it’s enough for me to get an idea what it might be like to work with larger amounts. By allowing myself this “indulgence”, I’m able to keep motivated toward my financial goals.
I’m all for saving, but you’re basically taking home equity money and investing it. Taking money at whatever your percentage rate is (say 7%) and investing it trying to get more, say 10%, only netting yourself 3%.
I’ve been fortunate so far. My $838 is now worth $1043.75, for a return of nearly 25%. Did I get lucky? Probably.
If I were in your shoes, I would hold off on investing while I had outstanding interest accruing accounts.
You’re right that this is makes the most sense from a purely mathematical perspective. And that’s why I don’t intend to max out my IRA until the home equity loan has been eliminated. But I’ll continue to put a few hundred dollars into it now-and-then.
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“We keep separate finances — that’s a subject for another entry.”
My husband and I also keep separate finances. In fact, we have separate cars, separate computers, separate home offices, separate credit cards, and we each have our own last name.
I always find it amusing when people with joint finances ask why we do this.
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Congratulations on your progress, its really great to hear. I’ve been a subscriber to your site for quite some time, but have never commented on anything so far.
My wife and I will be married for a year later this month — and we are completely debt free along with a sizable savings account for young twenty-somethings. Since day one we’ve had problems with how we each manage our own money; we each have our own philosophies and the only common account we have is our primary savings account. I’d be really interested in finding out more on how you and your wife handle your accounts.
Justin
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Allie,
Could you explain why you and your husband have separate finances? I honestly can’t think of any benefits to doing things that way. If my wife and I were to have separate finances, I’d be much better off than she is (even though she does a more important job than I do, she gets paid far less). Even if we made the same amount of money, one of us would always be doing better financially based on individual savings and spending patterns. Combining our incomes keeps us on the same page. We still have separate computers, cars, etc, and we spend our money in completely different ways.
-J
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Way to go JD! Having a plan and putting it to work is the best encouragement. Don’t let people tinker with your plan willy-nilly. There can be good advice, but you need to trust the people giving it first. You know your and your wife know your situation best, so you are in the best position to make your plans.
My wife and I are doing much the same thing. We have an expected payoff date (all but mortgage) of July 2007. We are a family of 5 with one income. We are busy selling stuff on eBay to reach our goal.
Next time you feel tempted to spend on some new gee-whiz gizmo, remember that you’ve already spent that money and denying yourself equals earning that money. A penny saved is a penny earned.
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Good work JD. I’m sure you’ll find other ways to scratch up a buck or two a month as well. Don’t discount your chances of accelerating the repayment schedule as ou refine your saving skills.
Here’s my latest: take 2 cups of hot chocolate mix (from costco), mix with 2 cups sugar. The go get some peppermint-flavored cream for your homemade coffee. Add 2 tablespoons to your morning cup, and you’ve got yourself grande peppermint mochas for the winter months, and a sizable amount of extra cash per month (# of trips saved to startbucks/month times about $5)
For me, this is adding up to about $40 per month, and I’m a light starbucks patron. $40/month is equal to my savings of a programmable thermostat and my compact fluoresent bulbs. Overall, that’s $120/month saved, and I still have adequate light, heat and coffee.
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J.D.,
Congratulations on your great progress.
My wife and I had a similar experience, though I was the one who brought in the overwhelming majority of CCard debt to the relationship thanks to a poor financial education. All of that is behind us now after we spent the last three years paying off our debts (except the house) using the snowball.
We are ecstatic that this is our first debt-free holiday season. But that did not give us an excuse to spend like madcats, even though it was very tempting.
What worked for us was to incorporate some spending into our plan, though we redirected the behavior into savings. At the beginning of each month, we set aside a portion of our budget to savings for particular categories of expenses incurred throughout the year (e.g., insurance, car repair, etc.) and transfer it to our PayPal money market account.
By dividing these (typically) one-time expenses up into 12-month “payments,” we know we have the cash on hand to pay for them when needed and without having to scramble to pay the bill (or putting it on a credit card… which is something we used to do). As an added bonus, we are earning interest on these “expense” categories, which is a great feeling.
Using this mentality, we also save for some “splurge” items through the year. This year, we saved an extra $80 a month and used those funds to buy ourselves a nice digital SLR camera. I cannot tell you how great it felt to 1) “splurge” on a “toy” and 2) not have to go into debt to do it.
We are still saving toward our emergency fund, but these little one-time expenses really help curb our spending “need” by giving ourselves little “victories” on our path to financial success. I am not sure if this type of thing work work for you and your plan, but I thought I would share nonetheless.
Keep up the great work! The end is near!
-J.S.
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It’s funny, my salary is five times higher than my (common law) wife’s. The fact that we keep our finances separate actually helps me save money, because we live on her level — she doesn’t like to ask for money from me and wants to share expenses evenly, so we spend only what she can afford. I do spend some money on myself, but probably not as much as I would if we had a joint account. In the four years we’ve been together we’ve gone out to maybe three concerts and two movies. She does let me treat her to supper out once every month or two. The upside is that I’m saving tons of money for a house and our retirement.
I had a joint account in my first marriage, and it was always a source of tension.
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J.D.,
Congratulations on all your progress. I understand that you still want fun shiny stuff (I keep holding off from the iPod’s siren song, but my resolve weakens every time the feature set improves). Perhaps you should make that part of your goal?
“If I’m other-than-mortgage debt free by 39 or so, I will then start saving for a major treat for my 40th birthday.” (“Major treat” to be defined as you and your wife see fit.)
The best of luck to you.
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Brad,
Your system sounds good except for one thing – you are currently getting rich (by saving 80% of your income), but your wife is not. What happens later on down the road when you have millions and she doesn’t?
I’m being very serious with these joint vs. individual account questions by the way. I’m not trying to put anyone down who doesn’t do things the way my wife and I do. I just can’t see a way that separate accounts will work unless you eventually plan to pool the money and I’m interested in how people have worked around this issue.
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our system sounds good except for one thing – you are currently getting rich (by saving 80% of your income), but your wife is not.
Well, you have to keep in mind that have separate accounts was her idea, not mine. It is very important to her to be able to make it on her own without anyone’s financial help. Also, I’m saving most of that money to buy us a house, and we will split the ownership equally even though I’m contributing nearly all of the money.
I don’t think I’ll ever have “millions,” by the way…I live in Québec, which is the most highly taxed jurisdiction in North America. My income tax rate is 52 percent!
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But I still feel the urge to spend.
It never goes away, does it? I still struggle with my inner consumer, it drives me crazy.
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Just a reminder to the joint vs. separate finances debaters: I’ll post an entry specifically about this subject in the next few weeks. Feel free to discuss it here, but save some of your energy for that entry, too!
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Jag Nogg et al, perhaps you and GetRichSlowly could cooperate on a joint article talking about the pros and cons of having joint/separate accounts. That would be an interesting read.
Congrats on your progress, J.D. I feel your pain on the comic books. I wish there was a comic book lending library; it would spread out the cost among several readers. Wouldn’t that be nice!
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That definitely is the light at the end of the tunnel. I feel i’m a couple years behind you in getting my debts paid off. Hopefully I’ll be able to catch you by 2008!
Congrads on making it this far. As for the wanting to buy stuff, I can sympathize with the pain because I go through it every time I enter an electronics store.
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I’m an only child and never learned to share…
Suffice to say that people with separate finances rarely feel the need to defend their choice in this matter. As long as all the bills are paid on time, how you arrive there does not really matter, in my opinion.
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Keep up the good work. You’re inspiring us all!
-William
A Financial Revolution
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I’m the same way about money burning a hole in my pocket. I used to use any kind of extra money or bonus to run out and buy myself some new toy or gadget. It’s only recently that I’m learning some really important lessons that keep me from buying:
1. It’s cliche, but want does not equal need. I don’t NEED a new computer, I WANT a new computer. And it’s funny how all the things I NEEDED a year ago are sitting in the garage sale pile or the eBay box.
2. This is the main issue… when you have credit card debt or other high-interest debt, you do not have money. Your bonus is still NEGATIVE money. That is to say, even if you buy something with cash, you are still in debt. You’re just shuffling the numbers around. If you are in debt, you just plain cannot afford to buy more stuff. That money is WORTH MORE paying off your interest-laden debt than buying some new toy that’s going to depreciate. Say your bonus is $100. Putting it toward a CC debt could save you $140 in the long run when you factor in interest.
3. Pretend the concept of “buying on credit” doesn’t exist, and only buy what you can afford or have saved for. After I pay off my CC debts I plan to follow this policy. If you really wanted something, you’d save up for it and buy it outright, rather than signing yourself up to pay even TWICE as much in the long run in interest. Think: would I buy that bike if it cost twice as much?
I know I’m preaching to the choir here but maybe hearing it again will help.
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Congratulations on paying down your debt and on being on your way to be totally debt-free. I don’t think it matters as much HOW you do it but, rather, that you do it. I think at some point in our lives we all want to be debt-free as soon as possible. You should stick with whatever strategy you have that you’re comfortable with (read: “can sleep at night”).
“But I still feel the urge to spend.”
I get those urges once in a while (i.e., MP3 player, digital camera, CDs, laser printer). The research, build-up, momentum, nailed-it-down-to-one-option, and final purchase is inversely proportional (in terms of time and energy spent) to the enthusiasm I feel once I bring it home and use it once. I can’t remember the last time I listened to my MP3 player, or took a picture, or heard one of the many CDs I bought. For the life of me, I don’t know why this happens…
Please start an article about separate/joint accounts. It will be a definite hit!
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separate finances: if one spouse dies or leaves, the other spouse is only legally responsible to pay off those debts which he cosigned on or were for the benefit of the union.
In other words, you don’t have to pay for your wife’s credit cards if she dies, goes to jail, divorces your slovenly ass and decides to default on it just to hurt you, etc.
at least that’s how it works in my state. your mileage may vary.
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“you’re basically taking home equity money and investing it. Taking money at whatever your percentage rate is (say 7%) and investing it trying to get more, say 10%, only netting yourself 3%”
It’s actually a bit more complicated than that. The interest paid on the load is tax-deductable, so JD will get a portion (perhaps a third, depends on his tax bracket and whether or not Oregon has a state income tax) of that interest back. Meanwhile, that Roth IRA is growing tax-free. So if his interest is in effect around 4.5-5% after taxes are accounted for and his gain is 10%, he is in effect netting twice what he is paying in interest.
Also, take into account that as he pays down his debt, his interest payments go down and he gets more equity per payment. Meanwhile, his Roth IRA contributions keep adding to the gains already accrued and compounded over time. So while I ordinarily would not endorse that anyone go into debt to finance investment, there are definitely certain exceptions that I would be wiling to make. A house would be one. An education would be another. A Roth IRA would be a third thing. In all respects though, one should never invest more than they can afford to. For example, going into debt for a house is alright. But buying more house than you can afford is going to get you into trouble.
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Hey JD
I did more or less the same thing a few months ago. Just out of college, I finished my summer internship and was jobless for about a month. It was really depressing, especially because my student loans were coming in the mail any minute and my credit card account was about to close on me for not making payments.
I wrote out a financial plan that really put me at ease. Now, two months in, my credit score is mending itself, I have a great job at a great company doing exactly what I want to do, all of my debt will be paid off in 2 years and then I can start saving up for graduate or business school.
Keep on doing what you’re doing. Huzzah.
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Hi JD,
Congrats on getting to the point where you see the light at the end of the tunnel. What I find interesting is that you don’t include your mortgage in the “debt free” goal.
My wife and I are in the fortunate situation of being entirely debt-free (except our mortgage) right now (we’re 29) and we aim to have the mortgage fully paid off by the time we hit 40. I consider my mortgage to simply be another debt.
Perhaps the difference is that I’m in Canada, where mortgage interest isn’t tax-deductible…
Also, I look forward to the “joint vs. separate accounts” post in the next few weeks. My wife and I keep most accounts separate, but have a joint savings account for larger purchases.
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Good luck J.D. We are all rooting for you to be debt free by March 2008. Keep us all posted on your progress from now until March.
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I too will be interested to see the joint/separate post even though I’m single. In general, its bound to be a ‘horses for courses’ thing, and what suits one couple, won’t suit another.
Anyway, I don’t include a mortgage in being debt-free either. I mean I know its debt, but I actually think of it as more like rent. I mean I’ve got to live somewhere, right?
Related to that I don’t think of my student loan as debt, although this is psychological.
The interest rate is 2.4% (deliberately the same as inflation). Payments are income contingent (9% of income above £15,000 oer annum) and collected through the tax system. I owe about £10,000 and if I carry on making payments at the same rate as I am now it will take me another 14 years to pay off.
To me, this is like forever and there’s no financial benefit to trying to paying it off early. So to help me sleep at night, I think of it as extra tax.
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JD,
Very encouraging article. I just stumbled upon your blog while checking out Iwillteachyoutoberich.com. I really like your article about light at the end of the tunnel. My wife and I have been working on a similar plan to pay off all of our debt. We are huge fans of Dave Ramsey and we set up our debt plan based on Dave’s Debt Snowball. Instead of paying off the highest interest rate item first we chose to pay off the smallest bill. Dave likes to call them “little wins,” and we’ve kept rolling up the payments to other debts and we’ve found that to work well for us. It’s good to see other people doing the same thing. I applaud your efforts and I really like your blog and I plan on linking mine to yours ASAP. I hope you and yours have a great Holiday Season.
God Bless,
Randy Wilburn
pottpodcast.org
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JD, good for you for heading in the right direction. My advice for those oh so tempting things you wish you could buy with that cash on hand: give yourself a timeframe. For each item, set some time in the future (next Christmas? next summer? when you’re totally debt free? your call), you will re-evaluate whether you still want that item. In the meantime, comparison shop, gather info, learn as much as you can to make a good decision. At the appointed time, decide how you’ll accumulate the cash to pay for it outright–and while you’re saving, keep an eye out for a truly exceptional deal in case you can pounce and save yourself some cash in the long run.
Works for me. And then when I finally end up getting whatever it is I’ve been dreaming about…it’s really satisfying. I know I’ve made a good choice and gotten whatever it is at a good price.
I’ll look forward to the separate vs. pooled finances debate. In our 2-working-parents household we’ve got separate accounts for most day-to-day finances, but a joint account for mortgages, utilities, etc. All accounts are transparent and accessible to both of us, each of us are responsible for an agreed set of expenses, but no one has the other constantly looking over his/her shoulder.
I definitely still consider a mortgage as debt.
They’re not going to stop sending me a bill until the damn thing is paid off!
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